The Cabinet yesterday proposed an amendment to the Estate and Gift Tax Act (遺產及贈與稅法) that would lower the maximum rate on inheritance and gift taxes from 50 percent to 40 percent to match the income tax rate.

The tax-exempt threshold for inheritance tax will also be raised to NT$10 million (US$303,600) from the current NT$7.79 million, the Cabinet said.

"The main purpose of the amendment is to make our tax mechanism a fair game," Premier Chang Chun-hsiung (張俊雄) said during yesterday's Cabinet meeting. "The Ministry of Finance suggested to me that our tax laws be amended instead of being suspended. As a result, we will gradually amend it whenever necessary."

To improve the taxation system, the government will continue to tweak and simplify tax regulations over the next few years, Chang said.

This will include combining inheritance tax and gift tax into one tax by 2010, establishing a lifelong wealth-transfer system -- to allow a person to use the inheritance tax deductible for gifts given to relatives while alive -- and cutting the maximum marginal rate to 20 percent, Chang said, citing a proposal submitted by the finance ministry.

The draft amendment will be submitted to the legislature for approval. If approved, the amendment will take effect next year at the earliest, the ministry said in a statement yesterday.

"The revision in the regulations for gift and inheritance taxes is designed to cope with changes in society and is part of the ministry's broader plan to reform the nation's tax system," Minister of Finance Ho Chih-chin (何志欽) said in the statement.

The ministry said it would negotiate with political parties and gauge public opinion before pushing for final approval by lawmakers.

The rate cuts would amount to a reduction in tax revenues of approximately NT$11 billion a year, Ho estimated.

Deputy Minister of Finance Chang Sheng-ford (張盛和) told reporters after the meeting that the amendment would suit the average person's needs and make it easier for parents to transfer their assets to their children.

"The new regulations will make most people's lives easier, and that was the main reason we did this," Chang Sheng-ford said. "Even if taxed, [a person] can pay off the tax within three years, which would be easier for most people."

The Cabinet's draft amendment has drawn mixed reactions.

Most tax experts, including Yophy Huang (黃耀輝), an associate professor of public finance and tax administration at the National Taipei College of Business, said the change would help prevent further capital outflows.

Industrial associations, however, were not satisfied with the amendment.

"Small rate cuts will hardly be of use in bringing back capital earned by Taiwanese businesspeople overseas or in spurring direct investment," said Wang Ying-chieh (王應傑), spokesman for the General Chamber of Commerce (商業總會).

The chamber had proposed halving the maximum tax rates and raising the tax-free threshold to NT$30 million, Wang said.

To evade tax, Taiwanese overseas often deposit money in banks abroad, he said.

The Chinese National Association of Industry and Commerce (工商協進會) also said the proposed amendment was "a far cry from what we wanted."

The association said it had hoped the government would scrap the inheritance tax, as many other countries have done.